United States: The Supreme Court Appears To Endorse SEC-Reporting Requirement For Dodd-Frank Whistleblowers

On November 28, 2017, the Supreme Court heard oral argument in the closely-watched Digital Realty Trust, Inc. v. Somers (16-1276), which addresses the issue of whether whistleblowers who report suspected violations of the securities laws internally, but not to the Securities and Exchange Commission (SEC or Commission), are protected by the anti-retaliation provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). ¹

A majority of the Supreme Court justices appeared to endorse the view that the anti-retaliation provision of Dodd-Frank is limited to whistleblowers who have reported potential misconduct to the SEC. Based on the questioning, the Justices appeared to view the statutory definition of "whistleblower" as controlling, and appeared to regard the whistleblower protections available under Sarbanes Oxley as sufficiently protective of individuals and entities subject to mandatory (internal) reporting requirements. A decision is expected to issue by June 2018.

Background

As discussed in more detail in our November 27 Advisory, Dodd-Frank defines a "whistleblower" as "any individual who provides . . . information relating to a violation of the securities laws to the Commission."² Dodd-Frank's anti-retaliation provision expressly references the earlier-enacted Sarbanes-Oxley Act of 2002 (SOX), providing that "[n]o employer may" retaliate against "a whistleblower . . . because of any lawful act done by the whistleblower" in providing information to or assisting the Commission or "in making disclosures that are required or protected under" SOX and other laws.³ A key question is whether Dodd-Frank's explicit reference to SOX provisions that do not require reporting to the SEC expands the categories of individuals protected by Dodd-Frank's anti-retaliation provision beyond its more narrow definition of "whistleblowers." In 2011, the SEC promulgated an interpretive rule that defined "whistleblower" for purposes of Dodd-Frank's anti-retaliation provision to include those who only report suspected misconduct internally, as well as those who report to the SEC.⁴

In Somers, the Ninth Circuit joined the Second Circuit in holding that the SEC's interpretation was entitled to deference and promoted the apparent purpose of the Dodd-Frank to enhance protections for all whistleblowers.⁵ The Fifth Circuit, applying the Dodd-Frank definition of "whistleblower" as an individual who reports "to the Commission," arrived at the opposite conclusion.⁶

The Oral Argument Before the Supreme Court

During the oral argument before the Supreme Court, counsel for Digital Realty argued that the plain language of Dodd-Frank defines a "whistleblower" as an individual who reports suspected wrongdoing "to the Commission," and because the anti-retaliation provision states, "[n]o employer may" retaliate against "a whistleblower," it explicitly protects only those who report to the SEC.7

Counsel for Mr. Somers and the United States, which appeared as amicus curiae in support of Mr. Somers' position, argued that Digital Realty's interpretation of the statute was at odds with Dodd-Frank's intended purpose of bolstering the existing SOX anti-retaliation protections for all whistleblowers.⁸ Both argued that anomalies would result from Digital Realty's proposed limiting interpretation. For example, Mr. Somers' counsel argued that SOX imposes mandatory internal reporting requirements on certain categories of employees, including auditors and attorneys, and that Dodd-Frank would leave such employees without protections if retaliation occurred before they had the opportunity to report to the SEC.⁹ The government argued that Digital Realty's proposed interpretation would "decouple retaliation liability from the [a]ct that causes the retaliation," and potentially "make employers liable for conduct they don't know about" since reports to the SEC are confidential.¹⁰

Justices Ginsburg, Sotomayor, Kagan, and Breyer all questioned Digital Realty's counsel about inconsistencies between Dodd-Frank and SOX and anomalies produced by Digital Realty's interpretation.¹¹ On the whole, however, these justices appeared to favor Digital Realty's interpretation of the statute.

Both Justices Breyer and Gorsuch expressed the view that whistleblowers subject to mandatory internal reporting requirements are sufficiently protected under SOX's anti-retaliation provision.¹² Justice Breyer indicated to Mr. Somers' counsel that his interpretation would lead to a greater anomaly: "if, in fact, you read it your way . . . we've basically eliminated Sarbanes-Oxley because everybody would bring [whistleblower claims] under [the Dodd-Frank anti-retaliation] provision."¹³

In perhaps the most telling exchange, Justice Kagan asked the government, "you have this definitional provision, and it says what it says. And it says that it applies to [the Dodd-Frank anti-retaliation] section. And you have to have a really, really severe anomaly to get over that. . . . It's odd; it's peculiar; it's probably not what Congress meant. But what makes it the kind of thing where we can just say we're going to ignore it?"¹⁴ Justices Roberts, Gorsuch, Alito, Breyer and Ginsburg all expressed similar reservations that any anomalies produced by applying the Dodd-Frank definition of "whistleblower" to its anti-retaliation provision would simply be insufficient to disregard the plain text of the statute.¹⁵

A decision is expected by June 2018. Should the Supreme Court rule in favor of an SEC-reporting requirement for Dodd-Frank whistleblowers, it may lead to fewer whistleblower claims brought under Dodd-Frank and, instead, more claims pursued under SOX. In addition, as Mr. Somers' and the government's counsel argued, it may provide an incentive for whistleblowers to bypass internal compliance and report directly to the SEC, which may lead to an increase in costly and intrusive external investigations.

Footnotes

1 For an in-depth analysis ofDigital Realty, see our prior advisory, Supreme Court to Decide Whether Dodd-Frank Whistleblowers Must Report to the SEC (Nov. 27. 2017).

2 15 U.S.C. § 78u-6(a)(6).

3 15 U.S.C. § 78u-6(h)(1)(A).

4 17 C.F.R. § 240.21F-2;see alsoSecurities Whistleblower Incentives and Protections, Release No. 34–64545, 76 Fed. Reg. 34300–01, at *34304 (June 13, 2011).

5 See Somers v. Digital Realty Trust Inc., 850 F.3d 1045 (9th Cir. 2017);Berman v. Neo@Ogilvy LLC, 801 F.3d 145 (2d Cir. 2015).

6 Asadi v. G.E. Energy (USA), L.L.C., 720 F.3d 620 (5th Cir. 2013).

7 Transcript of Oral Argumentat 3-5.

8 Id.at 29-30, 46-47, 53-54.

9 Id.at 34-37, 46-47.

10 Id.at 48.

11 Id.at 5-18.

12 Id.at 33-34, 53.

13 Id.at 34.

14 Id.at 48-49.

15 Id.at 32-34, 50-52.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.